CMCC Webinar Blue Growth: science, society and innovation. A focus on the Mediterranean and Black Sea Presenter : Giovanni Coppini CMCC, «Ocean Predictions and Applications» Division Moderator: Simona Masina CMCC, «Ocean modeling and Data Assimilation» Division 27 March 2018
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The CMCC Foundation RESEARCH DIVISIONS Advanced Scientific Computing (ASC) Climate Simulation and Prediction (CSP) Economic analysis of Climate Impacts and Policy (ECIP) Impacts on Agriculture, Forests and Ecosystem Services (IAFES) Ocean modeling and Data Assimilation (ODA) Ocean Predictions and Applications (OPA) Risk Assessment and Adaptation Strategies (RAAS) REgional Models and geo-Hydrological Impacts (REMHI) Sustainable Earth Modelling Economics (SEME)
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CMCC webinar, Zurich, Nov 12, 2018 Prof. Tobias Schmidt, Dr. Bjarne Steffen, Energy Politics Group, ETH Zurich, www.epg.ethz.ch Low-carbon energy finance new research results and their implications for modelers and policy makers This project has received funding from the European Union's Horizon 2020 research and innovation programme under grant agreement No 730403, as well as from the European Research Council under grant number 313553. It has also received funding by the Swiss State Secretariat for Education, Research and Innovation (SERI) [contract number 16.0222] and ETH Foundation. The opinions expressed & arguments employed herein do not necessarily reflect the official views of the Swiss Government. The project was also supported by a seed grant from ETH Zurich foundation.
D GESS EPG’s research framework: Analyzing the co-evolution of policy with technological change Energy sector Technological Change Politics Policy (Innovation, Diffusion, Finance ) We are an interdisciplinary team of engineers, economists, and political scientists EPG | Energy Politics Group | | 9
D GESS Financing is more relevant for low-carbon energy technologies, due to their higher capital intensity Percentage of different cost components in LCOE 3% Cost of equity CAPEX Avr fossil fuel- 8% 85% based power Cost of debt OPEX (O&M, fuel) 4% Solar Note: Assumes 5% cost of debt, 10% cost of equity, 17% 15% 56% 12% Photovoltaic data based on Schmidt, 2014 (Nature Clim. Change) Wind turbines 18% 15% 58% 9% (onshore) Impact of increased cost of capital on LCOE EPG | Energy Politics Group | | 10 Source: Schmidt, 2014 (Nature Clim. Change)
D GESS The four papers of this talk and their key messages Main messages Main messages Main messages Main messages • Renewable energy • The cost of capital for • “Green” state • Multilateral development assets heavily rely on project-financed investment banks (SIBs) banks (MDBs) have non-recourse project renewable energy help in overcoming “greened” their power finance (vs. corporate assets has fallen investors’ aversion generation portfolios to finance for conventional substantially over the against new energy very different extents plants) last 15 years assets • Key driver is debt • We detect a financing • SIBs found to crowd-in • MDBs’ public sector overhang of fast- experience curve private finance rather branches are typically growing new entrants (investors also learn) than crowd-out less “green” than their private sector branches EPG | Energy Politics Group | | 11
D GESS Project finance: A niche of capital markets, but not for RE Corporate Finance (CF) Project Finance (PF) Financing of new project on the balance Creating a special purpose vehicle sheet of the sponsor (SPV) to incorporate new project Using assets and cash flows from No guarantee from sponsor’s assets, existing firm to guarantee additional lenders depend on cash flows of new credit provided by lenders project alone Cost of capital determined by sponsor Cost of capital cost determined by solidity project cash flows and risks Classical economic motivations for PF do not hold for renewables in OECD countries Thus study addresses research questions: 1. How important is project finance for renewable energy projects in developed, low-risk countries? 2. What are the drivers and underlying reasons to use project finance in such settings? Steffen, B. (2018), The importance of project finance for renewable energy projects, Energy Economics (69), 280–294. EPG | Energy Politics Group | | 12
D GESS Quantitative analysis of extreme low-risk case DE Case selection: Germany Data: Utility-scale projects 2010–2015 Polar type sampling: DE as extreme Analysis of new dataset, combining example of low-risk environment for asset list from grid regulator with renewables financial info from trade register «Best-in-class» as per UNDP Showing finance structure in population Well-developed capital markets Regression analysis to identify drivers Steffen, B. (2018), The importance of project finance for renewable energy projects, Energy Economics (69), 280–294. EPG | Energy Politics Group | | 13
D GESS Results: High share of PF for RE, driven by new players Renewables with much lower risk than Key reason: small balance sheets fossil fuels – still, use more project finance of new players in industry German power generation projects 2010–2015 Results from regression analysis on rationales to use project finance No. of Project finance Corporate finance projects Negative financial 1. Contamination risk Feed-in tariff Solar PV 96% 4% 83 synergies with 2. Debt overhang existing business Wind 3. Securitization 88% 12% 185 onshore Wind 50% 50% (Further) market 4. Information asymmetry 12 offshore imperfections btw. sponsor & lender 5. Agency owners & mgrs Gas 6% 94% 31 Merchant Hard coal 22% 78% 9 Considerations 6. Horizontal joint ventures regarding 7. Independence civic prjcts org. structure Lignite 100% 5 100% Steffen, B. (2018), The importance of project finance for renewable energy projects, Energy Economics (69), 280–294. EPG | Energy Politics Group | | 14
D GESS The four papers of this talk and their key messages Main messages Main messages Main messages Main messages • Renewable energy • The cost of capital for • “Green” state • Multilateral development assets heavily rely on project-financed investment banks (SIBs) banks (MDBs) have non-recourse project renewable energy help in overcoming “greened” their power finance (vs. corporate assets has fallen investors’ aversion generation portfolios to finance for conventional substantially over the against new energy very different extents plants) last 15 years assets • Key driver is debt • We detect a financing • SIBs found to crowd-in • MDBs’ public sector overhang of fast- experience curve private finance rather branches are typically growing new entrants (investors also learn) than crowd-out less “green” than their private sector branches EPG | Energy Politics Group | | 15
D GESS Literature lacked an analysis of the financing cost dynamics of renewables Our research questions 1. How and why did solar PV and wind onshore financing conditions in DE change over time? 2. What is the effect of these changes on their generation costs (LCOE)? Challenges: Scarce data, as financial details of project finance deals not disclosed For “why” part: Interest rate levels affected by multitude of drivers EPG | Energy Politics Group | | 16
D GESS We focus on Germany and use a mixed-method approach, taking four steps 1 Descriptive: Elicitation and mapping of project finance data Cost of equity, cost of debt/debt margin Leverage, loan tenor, debt service coverage ratio 2 Qualitative: Investor interviews to identify drivers for changes Semi-structured interviews, grounded theory-type coding of arguments 3 Quantitative: Regression analysis for experience curves Various specifications of dependent and independent variables 4 Model-based: Split-up of LCOE into technology cost effects Calibration of levelized cost of electricity (LCOE) in different settings Egli, F., Steffen, B., Schmidt, T. S. (2018). A dynamic analysis of financing conditions for renewable energy technologies. Nature Energy, available online EPG | Energy Politics Group | | 17
D GESS Step 1: Historic development of the cost of capital 15 Solar PV Wind onshore 10 5 0 2000 2005 2010 2015 2020 2000 2005 2010 2015 2020 f debt CoC 6 -69% 6 5.1 -58% 5 4.5 4 2.2 4 2.8 1.4 2.4 3 Egli, F., Steffen, B., 1.9 2 2 Schmidt, T. S. (2018). 1.6 2.3 2.5 A dynamic analysis of 1.0 0.6 1.1 2.3 financing conditions 2.1 1.2 1 for renewable energy 0.9 0.9 technologies. Nature Energy, available 0 0 online change Ø 2000 - 05 2017 Cost of equity Cost of debt EPG | Energy Politics Group | | 18
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